Oct 27 - Nov 02, 2003




There is severe housing shortage all over the country. Shortage is more pronounced in the cities and towns, of which population is increasing fast partly due to influx of people from rural areas. The Government and the State Bank of Pakistan (SBP) have been encouraging banks and financial institutions for financing of housing units, the backlog of which is presently around 4.5 million units. According to 1998 Population and Housing Census, in Pakistan, there were over 19.3 million housing units in the country. Of the total (19.3 million) housing units, 67.7% were in rural and 32.3% in urban areas, nearly 15.6 million or 80.8% were owned, 1.7 million or 9.0% rented, and 2.0 million or 10.2% rent free. The proportion of owned housing units was higher in the rural areas compared to the urban areas. However, the percentage of rented houses was significantly higher at 23.2 in urban areas as compared to only 2.3% in the rural areas.


On the basis of the World Bank's recommended occupancy rate of 6 persons per house, total number of housing units presently required is estimated at 24.8 million units, based on population of 149 million. According to one estimate (National Housing Policy), the country needs an additional supply of 570,000 units per annum while the actual supply does not exceed 300,000. Thus there is a net shortfall of 270,000 units per annum and the backlog is increasing every year. On this basis the current stock of housing units is placed around 20.3 million, leaving a backlog of 4.5 million units.

Major emphasis of the National Housing Policy-2001 is on resource mobilization, land availability, incentives for home ownership, incentives to developers/constructors and promotion of research/development activities to make construction cost-effective. The policy also aims to ensure construction of housing for the poor as well as for the majority of rural population through use of different instruments like free land, cross-subsidy and concessionary finance. One major obstacle has been shortage of housing finance, a critical input for promotion of construction industry. Other significant constraints that either increase cost of transaction or increase risks for the lender include poor record/retrieval of property rights, high stamp duties, bureaucratic delays, corruption, disorganized state of the real estate market, etc. Therefore, the government has taken a number of steps which include: (i) Tax deductibility of mark-up up to Rs.100,000 per annum on home loans; (ii) Strengthening of legal framework for loan recovery through Financial Institutions (Recovery of Finances) Ordinance, 2001; (iii) Reduction in general interest rates which should enable banks to provide more affordable mortgages; and (iv) Amending HBFC Act for providing Sharia-compliant housing finance product, which has since been introduced.

The SBP Governor, as a keynote speaker at two-day workshop on housing finance organized by the World Bank/the IFC at Karachi recently, analyzed the prevailing situation. He informed that four focus groups have been formed for continuous follow-up of housing issues relating to rationalizing existing property documentation, automation of revenue records, simplification and standardization of mortgage documents in the four provinces. He reportedly said the SBP would be approaching the honourable chief justices of the Supreme Court and High Courts and request them to issue instructions to law-enforcement agencies, courts and registrars regarding the newly-promulgated recovery laws and instituting training for speedy resolution of property disputes.

The main points emphasized by the SBP Governor in his address, as gathered from the press reports, are briefly listed below: (i) High rate of duties and fees still remain an impediment in property transactions, and the provincial governments have not rationalized these rates on conveyance deeds despite the recommendation of the NHP-2001, and the Advisory Group on Housing Finance set up under the SBP; (ii) Land for genuine and approved new housing schemes with clean titles deed, developer financing, provision of infrastructure and individual mortgage financing have to become available in an integrated manner. He said he would urge the Boards of Revenue of the provincial governments that benefit of utilisation of government land should reach the middle and lower classes. Rather than sitting tight on the state land, to be encroached upon by land mafia, it should be put to legitimately profitable use; (iii) Calling upon the developers, he advised them to organize into public/private limited companies and to get them rated by credit rating agencies to assess their financial strength and operational capability. Credit rating will give an element of respectability to this line of business; (iv) Calling upon the banks to develop expertise in underwriting housing loans, he told them that their major focus should be construction finance for middle-income groups and instead of creating an asset-liability mismatch, they should, as already allowed, be floating long-term mortgage bonds; and (v) Fund mobilized under the NSS, in excess of the budgetary requirements, could be allocated to commercial banks for housing finance.



The backlog has developed over the years because of inadequate measures for increasing affordability of houses. Enhanced affordability would accelerate construction activities, ownership of houses and generate employment. The government has since decided to revitalize housing construction as a vehicle for economic revival. Housing backlog would start reducing only when more housing units are built during the year than are actually needed for the increasing population and replacements. This is a tall order but it is not beyond reach if federal, provincial and city governments including all the development authorities and the SBP resolve to further enhance the affordability of houses for homeless people. Help for building houses also needs to be provided on priority to the people who have been made homeless due to recent heavy rains and floods, particularly in Sindh and Balochistan.

Construction of housing units involves money, time and effort on the part of the prospective owners. Building of a modest house in a lower middle class locality in the normal course might cost Rs 1.50 million. Activities such as purchase of a piece of land, approval of the site plan/building plan, approval of loan, actual construction and finishing including provision/connection of utilities such as water, gas, electricity, telephone, etc. might take about one year. Besides, the owner might be obliged to spend on an average up to four hours per day on house related activities. For having a modest house the three key variables in the present case are the cost at Rs 1.50 million, one year time for completion and on average four hours daily involvement of the owner. Many prospective owners might not be able to afford all that. If some how, the cost of the same modest house is reduced to Rs 1.00 million, the construction time is reduced to six months and owners' daily involvement is reduced to about two hours, many of them might decide to start building their houses. The reductions in cast and other variable have increased their affordability for houses.

Affordability for housing is different for different categories of people. A daily-wager in normal circumstances is not expected to build a house by borrowing from HBFC or commercial banks. There is no hope for the job-less who are also home-less. Low-paid employees in the government or private service are also at a disadvantage if we go by the normal rules of mortgage finance. Housing affordability for all these people has to be some how increased so that in the next five years they can hope to be living in their own houses. The government and the SBP can only give them this hope.



The government has announced a number of steps in this regard but implementation thereon has to be accelerated. The SBP has taken substantive measures including creation of awareness about urgency for accelerating housing construction. However, as the job is gigantic, the SBP has as yet to do much more on different fronts. The SBP is in a position to advise the government and can also encourage the banks to introduce new products and schemes currently being utilized abroad with better results. The following steps for enhancing affordability of houses are suggested for consideration by the authorities.

a) A suitable plot of land is the main pre-requisite for construction of a house. The government (federal, provincial and district) are urged to increase supply of plots of land at appropriate locations and allot these to the homeless at affordable cost. The supply of plots of land has to be increased many-fold to tackle the backlog in housing units. The supply of plots of land can also be increased if various development schemes including schemes for the 'kachhi abadis' are cleared at the earliest by handing over the land to the respective executing agencies or to the prospective house owners. The schemes already under implementation for a number of years might also be expedited and the possession of the plots given to the owners for construction. For all these schemes required civic infrastructure might also be provided expeditiously. Large number of home-less people all over the country have booked plots of land with private housing cooperatives, some of which have been delaying things. The huge amounts of money stuck in these schemes need to be made productive and the plots given to the applicants at the earliest.

b) The private banks mostly orient their activities in housing finance to higher-income groups. Product modifications should have to be undertaken so that the (micro) credit technologies could be applied to provide small credits for housing to low income groups. The SBP can bring the housing finance and the microfinance community together to examine the practice of microfinance of housing. Based on this examination, action plans for houses can be developed particularly donor programs for the rural and urban homeless poor.

c) Bulk of households in most developing countries build their housing units incrementally over five to fifteen years. This process starts with somehow getting access to land and continues with building thereon a small makeshift unit, and later improvement and expansion of this unit. The incremental building process used by the majority of households in emerging countries would suit rural homeless in Pakistan. One or more short-term loans can fund steps in this process land acquisition, a sanitary core, or a room addition at affordable market terms because of small loan size. This process reduces term risk problems compared with mortgage lending, curtails housing subsidies and expands the number of households that social housing programs reach.



d) Time taken for the activities from land purchase to actual occupancy of the house after construction needs to be reduced. Particular delays are experienced in the land documentation/registration of title, approval of the building plan, actual construction, getting connection from utility companies, award of the completion certificate, etc. In case the rules are made simple, fair and transparent at the level of the government departments, lot of time, cost and effort can be saved. Existing procedure are more of anti-affordability for houses. Standardization of building plans for different plot sizes can help reduce the time and effort on part of the house owners as they would not be required to seek approval of the building plan, etc. if they construct according to any of the standardized plans.

e) In addition to private Builders and Developers, currently many public sector development agencies have taken upon them to build houses/flats for sale to prospective owners. A number of schemes started some years ago are yet incomplete. It appears as if these schemes have been abandoned. If there are problems, those may be sorted out and the construction completed so that supply of houses increases and the money blocked becomes productive.

f) House financing products as well as the loan documentation particularly loan security has to be adapted to the needs of the house-less people in the cities, towns or villages. Truth-in-Lending is important. The Government/SBP/SECP might ensure that the lenders actually charge what they promise in their marketing campaigns as cost of their financial products. There should be no hidden charges or the hidden clauses in the credit agreements. All the loan and security documents, including repayment schedule for the loan applied for, might be made available by the banks to the prospective borrowers before the loan is actually approved, for their review. A complete set of the documents must also be filed with the SBP. The lenders might charge from the borrowers a price for the set of documents. This should bring more transparency. The lenders must confirm to the borrowers the outstanding dues each quarter. The SBP might introduce standardized housing finance credit disbursement documents as it has recently done in respect of Agriculture Credit for maintaining uniformity and to facilitate the farming community.

g) In Pakistan, the cost of the plot of land/house and the annual rent are presumably determined solely by the lenders. The borrowers have little say in their determination. These two items are so priced that in most cases the prospective borrowers are possibly obliged to pay more to the lenders. This basis for determination has to be made more equitable and transparent and the borrowers, if not satisfied with the determination, should have the option to get it checked independently, without fear of any backlash from the lenders. In case the borrowers have for the construction of the house a piece of land that was purchased some years ago and of which the price has increased many times, independently determined market price of the land and not the original cost, should be used for determining the respective investment of the lender and the borrower.



h) The local banks may be encouraged to study and adapt the Islamic Housing Finance that is getting popular with Muslims, in USA and some other countries, who wish to avoid interest. Different schemes with slight variations are being practiced. In brief the scheme involves determining the monthly rental/lease rate of a similar house by contacting real estate agents. The client is also asked to do the same. The client and the bank officer compare the results of the survey and agree on a monthly lease/rental rate. The focal point is the utility value. The model calls for the financing entity to purchase the property jointly with the client. The client owns title to the property with the bank holding a first lien. Since the home is used as residence, the buyer will pay fair market rent. A portion of this rent will go towards the rent of bank's ownership, and another portion will go towards the buy out of the bank's share. The key feature of the schemes is that repayments are not based on pre-determined interest rates.

i) PACRA has been considering starting credit rating of Builders and the Projects as is being currently done in India. With a view to protect the prospective house owners, the government/the SBP/the SECP might consider prescribing compulsory incorporation and credit rating of the Developers, the Builders and the Projects, which invite any type of participation/subscription from the people for purchase of plots/houses.